Qantas Alliance with Air New Zealand

Qantas Airways and Air New Zealand have agreed to enter into a wide-ranging strategic alliance.

The alliance will involve Qantas taking a 22.5 per cent cornerstone shareholding in Air New Zealand.

Qantas Chairman Margaret Jackson said the Qantas Board had unanimously approved the agreement and the share transaction.

Ms Jackson said the Board believed the strategic benefits to both airlines would ensure they played major roles in growing the economies of both countries.

“This alliance is an outstanding example of CER at work and we are confident of its success,” she said.

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Qantas Chief Executive Officer Geoff Dixon said the strategic partnership would assist both airlines to retain their independence in an industry facing considerable and continuing difficulties.

“It will also improve job security for employees of both airlines and boost transport and tourism in Australia and New Zealand,” Mr Dixon said.

The strategic alliance agreement is subject to the approval of the New Zealand Minister of Transport (in his role as Kiwi Shareholder), Air New Zealand shareholders, the New Zealand Commerce Commission and the Australian Competition and Consumer Commission. Qantas today lodged an application with the Minister of Transport, Hon Paul Swain, for consent to own shares in Air New Zealand.

The agreement includes:

- Qantas and Air New Zealand forming a group, made up of an equal number of representatives from each airline, that will coordinate the entire Air New Zealand domestic and international network and Qantas flights to, from and within New Zealand; - Air New Zealand managing the day-to-day commercial aspects of these services with support from the coordinating group; - Air New Zealand and Qantas codesharing on all New Zealand domestic and trans-Tasman flights and on flights between New Zealand and the Americas; - Air New Zealand also codesharing on Qantas Australian domestic flights and Qantas international flights that connect with Air New Zealand flights; - Qantas inviting one Air New Zealand director to join the Qantas Board and nominating two representatives to be appointed to the Air New Zealand Board.

Mr Dixon said Qantas would fund the investment in Air New Zealand from some of the proceeds of the equity raising completed in August. He said it was anticipated that the alliance would deliver combined synergies of up to $NZ450 million by year three of the agreement and would be earnings per share accretive from 2003/2004 onwards.

Mr Dixon said Qantas would invest in Air New Zealand in three stages:

- first, if approval is obtained from the New Zealand Minister of Transport, Qantas will subscribe for convertible notes equal to a 4.99 per cent interest in Air New Zealand at NZ$0.445 per share; - secondly, approval by regulators and Air New Zealand shareholders will result in the notes converting to shares. At the same time, additional shares will be issued by Air New Zealand, taking the total Qantas equity investment to 15 per cent; - Qantas has an option to acquire the remaining 7.5 per cent at the time of regulatory approval or within three years of that approval. Mr Dixon said the alliance would enable both Qantas and Air New Zealand to make better use of their resources and capabilities, creating significant synergies and growth opportunities. In particular, the alliance would: - provide economic benefits over the next five years of more than A$680 million to Australia and about NZ$1 billion to New Zealand; - increase visitor numbers to both countries by tens of thousands each year through more effective promotion and more attractive holiday packages; - improve aircraft utilisation for both airlines, allowing for the development of new direct trans-Tasman routes that neither airline can offer independently; - improve the coordination of services both across the Tasman and within Australia and New Zealand; and - increase freight capacity to the benefit of exporters and importers in both countries.

“This alliance will allow both airlines to compete more effectively in an increasingly tough global aviation market,” Mr Dixon said. “Around the world, more than 200,000 airline jobs were lost between September 2001 and October 2002. A further 15,000 job cuts have been announced by US and European airlines this month.“In addition, at least 80,000 aircraft manufacturing jobs have been lost and Boeing announced last week that it would cut 5,000 jobs next year. “The IATA membership of airlines, which includes most of the world`s commercial airlines, collectively lost over US$12 billion in 2001 and they are forecast to lose a further US$5 billion in 2002.” Mr Dixon said that in this environment, airlines were increasingly entering alliances and equity partnerships to secure their long term survival. For example:

- Delta, Northwest and Continental are seeking approval for a codesharing and marketing alliance;
- United Airlines and US Airways are seeking approval for a similar alliance; - Alitalia and Air France have announced an exchange of equity; - KLM and Air France are in discussions about an exchange of equity. “Qantas and Air New Zealand together make up less then four per cent of the word aviation market and neither airline can ignore the forces of globalisation and consolidation that characterise this complex and demanding industry,” Mr Dixon said.——-